H-ONE INDIA (P) LTD.,UTTAR PRADESH vs. ACIT, NOIDA

The assessee Company is engaged in manufacturing of sheet metal through pressed, welded penal and sub-assemblies parts for auto mobiles and other equipments design, manufacturing of mobile forming, dies, welding jigs and inspection fixture. The Hongo Company Limited, Japan was having 95% share holding in the assessee company and Siel Limited, New Delhi at 5%. During the year under consideration, the assessee showed the sales operating income at Rs. 56,19,73,199/-, other income of Rs.1,05,385/- as against of Rs.51,90,18,622/- and Rs. 1,02,418/- respectively of previous year. Against which, the assessee claim total expenditure of Rs.49,99,82,082/- and disclosed book profit of Rs.7,44,71,164/- as against Rs.4,50,28,230/- after claiming expenditure of Rs.47,57,88,017/- for the previous year.

Ground No. 1, the assessee received the purchase order for supply of dies for Rs.2,00,00,000/- from Honda Siel Cars India Ltd out of which 3 dies were manufactured by the assessee company in the order of other dies were given to outside party. The said order was further increased by Rs.34,61,000/- . The copy of the purchase order was filed by the assessee to the Assessing Officer. The dies manufactured by the company were not supplied in the relevant year, but in the next year. The assessee submitted before the Assessing Officer that according to the sale price, the value of the dies was taken at Rs.46,31,000/-, though the total expenses for making the dies in the Financial Year 2002-03 where of Rs.1,07,01,674/- which included the supervision fee cost of Rs.56,60,991/-. The dies were to be supplied in 67 parts out of which, the company made in house 3 most critical parts dies and other small parts dies were developed outside the assessee’s office as stated by the assessee. The assessee submitted before the Assessing Officer that the supervision fee should not be included in the cost of die making and closing stock of in house made dies as the supervisors sent by the parent company had also worked on the dies as demanded by Honda Siel Cars India Ltd. and submitted that the value of the closing stock be taken as declared by it. The Assessing Officer has not accepted the explanation given by the assessee because the expenses related to the manufacturing of the dies which were sold in the subsequent year/next year i.e. in the month of September 2003 and there was no single die rather it included 67 parts. Therefore, the total cost was considered as the part of the closing stock for dies. Accordingly the closing stock was taken at Rs.1,07,01,674/- and interest of 46,31,000/-. Hence, the Assessing Officer made addition of Rs.60,70,674/-along with the payment of Rs.2,81,254/- as R & D Cess with R & D Cess Department against dies manufacture expenses which has not been included in the cost worked out by the assessee at Rs.1,07,01,674/-. Thus, the Assessing Officer made addition of 63,51,928/-.

The AR submitted that finding given by the Assessing Officer as well as. CIT(A) are not proper, as the loss were in respect of the supervision fee and supervision cost was Rs.56,60,991/-. The AR further submitted that the R & D Cess is a foreign Cess and the same cannot be included in the income/expenses of the assessee. The AR submitted that all the relevant purchase orders were submitted before the Assessing Officer as well before the Ld. CIT(A).

The DR relied upon the Assessing Officer as well as CIT(A)’s order and stated that contract with Honda Siel India Ltd. did not in any way made any terms as relating to bifurcation to in house manufacturing and out sourcing manufacturing. Therefore, the assessee cannot take the plea that the in house manufacturing is a separate from outside manufacturing.

We have perused all the relevant material and documents on record. We have heard both the parties. It is clearly stated that in the assessment order that the manufacturing of the dies was sold in the next year and there was no mention of single die. Rather, the entire 67 were taking into account by the assessee as well as by the Assessing Officer and Ld. CIT(A). The assessee got order from Honda Siel Cars India Ltd. for supply of dies, which was stated to be comprised 67 parts and dies were supplied by the assessee to Honda Siel Cars India Ltd. in subsequent assessment year. During the year, assessee has shown the value of closing stock of these dies at Rs. 46,31,000/- while the Assessing Officer mentioned that the total expenses for manufacturing of these dies amounted to Rs.1,09,82,928/-. The contention of the AR that only three dies were manufactured by the assessee and for the rest, the manufacturing was outsourced, will not change the accounting of the same manufactured by outside die makers and will eventually go into the stock of the assessee only. Thus, the assessee was not able to establish that there was separate purchase orders for the three dies and the rest of 64 dies which was outsourced. In fact, the said outsourced dies along with the 3 dies manufactured by the assessee was in entirety supplied to Honda Siel Cars India Limited only, on future date. Therefore, we uphold the finding of the Ld. CIT (A) as well as the Assessing Officer.

In result, Ground No. 1 is dismissed.

As regards to Ground No. 2 the assessee claimed the cess to the Central Government against the Royalty paid/payable to the parent company of Rs.3,00,317/-. As per letter dated 05.11.1997, the approval granted by the Government was of 3% of Royalty to be paid to the parent company by the assessee. The assessee submitted that subject to tax means the TDS deducted from the royalty for which the certificate is issued to the concern company and they claimed the benefit thereof in their Income Tax Return. The assessee further submitted that the cess claimed by them was paid to the Central Government against the royalty payable to the parent company. The Assessing Officer held that the submission of the assessee as regards to the TDS deducted from the royalty is different from R & D Cess and the same cannot be deductable from royalty. This was not accepted by the A.O and A.O disallowed Rs. 3,00,317/-. The CIT(A) held that the Government has granted approval for payment of royalty subject to taxes. The taxes means of taxes and, therefore, not restricted to TDS only. The CIT (A) upheld the orders of the Assessing Officer.

The AR submitted that the said findings are not in accordance with law, as cess to the Central Government against the royalty cannot be treated as a revenue expenditure. The AR further submitted that the Assessing Officer as well as the CIT(A) has ignored this fact hence the orders of the Assessing Officer and CIT(A) was not according to the approval of the Central Government.

The DR relied upon the order of the Assessing Officer as well as the Ld. CIT(A).

We have perused all the relevant material and documents on record. We have heard both the parties. We have noticed from the records that the government has granted approval for payment of royalty subject to taxes and hence the taxes does not restrict only to TDS only. The Government approval for payment of royalty though was subject to TDS it includes R & D Cess as well. Therefore, disallowance of the R&D Cess paid/payable against royalty to the extent of Rs.3,00,317/- was wrongly made by the Assessing Officer and also overlooked by the CIT(A). Thus, the contention of the Assessee is sustained.

In result Ground No. 2 is allowed.

In respect of Ground No. 3, the assessee imported the iron sheet from Honda Trading Limited, Japan in the coil form weighing 541.830 MT, which was sent to Mahendra Steel Service Centre, Pune for cutting in the blank size. They after cutting the same, transferred the goods to the assessee company. The goods so transferred were short by 5.447 MT, which was treated by the assessee as trimming allowance i.e. loss of material in process. The assessee submitted before the Assessing Officer that the said material has not been received by the assessee so far, therefore, neither it was the part of the assessee stock nor it can be considered as sale of scrap. It was further submitted that short of the stock was demanded from M/s. Mahendra Steel Service Centre, who has neither adjusted in the account nor remitted the short material and accordingly, the same was treated as trimming allowance by the assessee.

The submission of the assessee was not accepted by the Assessing Officer. The Assessing Officer held that it has simply tried to cover up the shortage by making the submission. Accordingly, the shortage of the stock of 5.441 Mt by taking an average value of Rs.30/- per kg. was inclusive of custom duty, which comes to Rs.1,63,410/- and the same was added to the income of the assessee by the Assessing Officer. The CIT(A) upheld the order of the Assessing Officer.

The DR submitted that the Assessing Officer as well as Ld. CIT(A) has correctly decided the same and there is a decision of Jurisdictional High Court in case of CIT vs. Citi Financial Consumer Fin. Ltd. [2012] 20 taxmann.com 452 (Delhi)

We have gone through the records and heard both the parties. The record show that the assessee imported the iron sheet from Honda Trading Limited, Japan in the coil form weighing 541.830 MT, which was sent to Mahendra Steel Service Centre, Pune for cutting in the blank size. They after cutting the same, transferred the goods to the assessee company. The goods so transferred were short by 5.447 MT, which was treated by the assessee as trimming allowance i.e. loss of material in process. The short fall of 5.447 MT is on account of the process loss, which comes approximately 1% and the same was borne by the assessee and the said loss was allowable under business expenditure. Therefore, the addition made by the Assessing Officer to the extent of Rs.1,63,410/- was not proper and the CIT(A) has also not given a correct finding.

In result, Ground No. 3 is allowed.

Accordingly, the appeal of the assessee is partly allowed.